Traditional Cost Allocation Systems

This course will teach you the fundamentals of managerial accounting including how to navigate the financial and related information managers need to help them make decisions. You'll learn about cost behavior and cost allocation systems, how to conduct cost-volume-profit analysis, and how to determine if costs and benefits are relevant to your decisions.
By the end of this course, you will be able to:
- Describe different types of costs and how they are represented graphically
- Conduct cost-volume-profit analyses to answer questions around breaking even and generating profit
- Calculate and allocate overhead rates within both traditional and activity-based cost allocation systems
- Distinguish costs and benefits that are relevant from those that are irrelevant for a given management decision
- Determine a reasonable course of action, given the financial impact, for a given management decision

GG

AP

May 28, 2018

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A very intensive informative course.\n\nAna Pelayo.

从本节课中

COST ALLOCATION

After learning how to conduct cost-volume-profit analyses, we're ready to discuss cost allocation and the different types of systems we can use: traditional and activity-based. From there, we'll learn how to calculate overhead rates and allocate overhead within both types of systems.

教学方

Luann J. Lynch

Almand R. Coleman Professor of Business Administration

脚本

Traditional allocation systems, like the plant-wide and departmental approaches, have their advantages. They meet financial reporting requirements for determining the costs to assign the inventory as product cost. And they're simple to use, which is a good thing. And they're based on information that's really easy to obtain. And for some companies, they may actually result in estimated product cost that accurately capture the cost of manufacturing those products. But for other companies, they may not. Now note that using these approaches to allocate overhead makes a couple of inherent assumptions. First, they assume that over time, overhead costs, either at the plant-wide level or the departmental level, depending on which traditional system you're using, change with changes in the allocation base, such as direct labor costs. Now think about that. If overhead is comprised primarily of costs associated with supervision and human resource management and administration, that assumption may be a valid one. In other words, it's likely that as a company has more direct labor cost over time, it probably does end up having more supervisory and human resource and administrative costs. So direct labor costs likely do drive those types of overhead costs. So products that use more direct labor probably do cause more of these overhead costs to be incurred. However, if overhead cost are comprised primarily of costs associated with processing customers orders, setting up the equipment to produce a new batch of products associated with those orders, and shipping the resulting orders of products made, then that the assumption may not be as valid. In that case, as the company accepts more and more orders as it grows, those overhead costs will probably be larger. So the number of orders likely drives those type of overhead costs and would be a more appropriate allocation base. The second assumption that these approaches to allocating overhead makes is that all products in the organization are equally responsible for the overhead costs that are incurred. Or they use overhead in the same proportions. And you can imagine though that some products are more complex to make or maybe made in smaller batch sizes. In cases like this, the assumption that all products use overhead in the same proportions may not be a valid one. It's also worth noting that over time the composition of costs, particularly in manufacturing organizations, has changed. Decades or more ago, manufacturing processes were very labor intensive. With little automation, little computerization, little technology. So indirect costs were a very small proportion of total manufacturing costs. So the bottom line was that the choices about overhead allocation didn't really affect the overall estimated product cost too much. But in recent times, we've seen increasingly more automation, and indirect costs now represent a much higher proportion of total costs. So choices in how you allocate overhead can change dramatically the estimated cost of a product. In other words, it can be harder to get accurate estimates of the cost of our products. In addition, over the past several decades competition has become more global, it's become more intense. So the implications of not having accurate estimates of the cost to make your product or offer your service have become more pronounced. So it's more important than ever to design good cost systems.